Renewing America

Examining Obama's Pipeline Decision

Interviewee: Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change, CFRInterviewer: Toni Johnson
January 20, 2012

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The Obama administration announced Wednesday that it was rejecting the application of TransCanada for a 1700-mile oil pipeline--known as Keystone XL-- intended to link the Canadian oil sands to the Gulf of Mexico. Michael A. Levi, director of CFR's program on energy security and climate change, says the debate over the pipeline has been exaggerated and is playing into a broader political narrative over environmental regulation in the country. "This has become a fight where one side says this is this extraordinary thing for energy security and the other says it's this horrible thing for the environment," Levi says. He adds, "If we get into the habit of having a lot of politics involved in what used to be fairly routine approvals and developments then that will become a larger economic problem."

Over the last year, the issue of the Keystone pipeline has been intensely debated, with claims about jobs and energy security and counterclaims about environmental harm. In a recent op-ed in the Washington Post, you put these positions in perspective. What were the main takeaways?

The arguments on both sides of the debate have been pretty badly exaggerated. Opponents of the pipeline talk about how it's game over for climate change, when the incremental emissions from the oil that goes through the pipeline would be tiny in comparison to the emissions that already exist in the world. The proponents of the pipeline talk about it as if it would allow the United States to ignore developments in the Middle East and become somehow free of Middle Eastern oil. Even if you say that in a slightly softer way, it's still a big exaggeration. Proponents also talk about [the creation of] hundreds of thousands of jobs, but there is just no economic analysis that can back that up.

Seven-hundred-thousand-plus barrels of new oil per-day is not insignificant, but people are saying that oil transport from Canada to the Gulf can be achieved by other means, such as expanding an existing pipeline and carrying oil by rail. So what does this really say about the importance of the Keystone pipeline?

In the near term, there is no pipeline constraint to bring oil from Canada into the United States, but one will be hit in perhaps five years (GlobeandMail) if the pipeline [capacity is not] improved. Then there is the issue of where you can get it to in the United States, because right now the way the infrastructure is set up, it doesn't take the oil to where it can be used in refineries as well as it should. There have been some developments over the last few months, particularly the impending reversal of something called the Seaway Pipeline (WSJ), which had taken some further pressure off and has made the decision on Keystone less consequential.

The United States should expect to pay the same amount for oil that comes from Canada as [it] would for oil that comes from any other part of the world.

Can you move things by rail? Sure. It's more dangerous, it's less environmentally friendly, but you can move oil by rail. Ultimately, though, you will need to expand pipeline capacity to bring more oil from Canada to the United States.

This decision comes as oil states such as Nigeria and Iran are in political turmoil; the Strait of Hormuz is in under threat again. The symbolism of increasing U.S. reliance on Canada's oil seems fairly strong, but, in practical terms, how much impact would it really have on oil prices and supply security?

There are two ways to think about this. The first is by focusing on the amount of oil in the world market. U.S. prices are essentially determined by how much supply there is and how much demand there is in the global market for oil. And so if all of the Canadian oil gets somewhere, whether it's to the U.S. or China or elsewhere, U.S. prices should be the same. [Though] if pipeline developments don't happen properly, then this oil could end up being shut in.

There's a separate point, where people seem to imagine that if you ship this to the United States, U.S. oil prices will be lower and the United States will have an advantage over other countries. There is no economic reason to believe that. The United States should expect to pay the same amount for oil that comes from Canada as [it] would for oil that comes from any other part of the world.

The Obama administration said this decision to halt the pipeline is not based on merits, but rather on the inability to meet what some have called an arbitrary congressional deadline. Was there a better way for the administration to handle this?

The original sin, if you will, in this was the decision back in November [2011] to delay a pipeline judgment until 2013. That set the ball rolling; then congressional Republicans in particular moved to force the administration's hand, frankly knowing that it would prompt the administration to reject it. In the end, environmental pressure grew, so they got what they wanted; the pipeline was provisionally, or at least for now, rejected.

The sponsors of the legislation with the deadline got what they wanted, which was not approval of the pipeline; it was a talking point for politics. Citizens of Canada, the pipeline builders did not get what they wanted; the markets didn't get what they wanted because it signals potential problems down the road for other pipelines. At this point, given the circumstances, it's hard to see how well the administration could have moved, but you still have to take a step back and ask how these circumstances arose.

We are in the midst of a presidential campaign and regulation of the environment has become a significant topic, with Republicans decrying EPA decisions on issues ranging from air quality to climate change. Some have accused the administration of political pandering with the Keystone pipeline case. What kind of impact is this decision going to have on the overall environmental regulation debate, and can you expand on how important some of these decisions are--or are not--for the Obama administration?

Small decisions are often forgotten unless they play into a broader narrative. And this is one of those decisions that plays into a broader narrative, and a broader debate about the Obama administration and environmental regulation. That's why I would expect it to remain a prominent feature of the presidential campaign. This is something that has become almost emblematic. People hear Keystone XL and it reinforces some feeling that they already have.

I remember talking to one person who asked me two questions about Keystone. The first was, "What do you think of Keystone itself?" And the second was, "Does it transport oil or does it transport gas?" What that said to me was that a lot of people seem to have an interest in it, even if they don't actually know much about the substance of what's going on. That makes, in some ways, for the perfect political issue.

In a properly functioning economy, people need to be able to build things with long time horizons, so long as protections are in place to make sure that they do not damage the public interest.

Looking at the energy debate over the last few years, has anything changed substantially? What has the United States done right and what could it be doing better on energy policy?

That's a huge question, but let's look at the politics to start with. The politics has changed dramatically over the last several years. First, look at the environmental side of things; in the last presidential campaign you had candidates from both sides promising to implement cap-and-trade systems. Today this is a major way that Republicans [attack] Democrats, and something that many Democrats are still attached to. In the previous campaign, you had Republicans wielding a slogan of "drill-baby-drill," and Democrats resisting that. Then President Obama actually wanted to move forward with drilling, but then you had the [Deepwater spill] and now things have gone in some ways back to their original positions.

The administration has been supportive of domestic development, particularly onshore, and shale. There's a lot more the United States could be doing: it could be doing more to help create a stable regulatory environment for domestic production; they could be doing more to regulate [the] industry so that we don't have harmful environmental consequences, particularly with respect to climate change; it could be doing more to support energy innovation.

Is there anything else salient to this issue?

It's worth stepping back on this, because this has become a fight where one side says this is this extraordinary thing for energy security and the other says it's this horrible thing for the environment. Ultimately, in a properly functioning economy people need to be able to build things with long time horizons, so long as protections are in place to make sure that they do not damage the public interest. If this is a one-off, it won't have much consequence, but if we get into the habit of having a lot of politics involved in what used to be fairly routine approvals and developments, then that will become a larger economic problem.

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